Enterprise Management Incentive (EMI) schemes are tax-advantaged share option schemes aimed at helping small and medium sized enterprises to attract and retain talent. There are key tax advantages for both employers and employees, provided that a business meets the relevant criteria to qualify for the scheme. EMI schemes can be complex to implement – alongside the usual considerations around valuation and whether or not the criteria for the scheme are met, there are a few key legal considerations listed below which business owners should be aware of when looking to put a scheme in place.
1. Clearly define the terms of the Options
It is important to be clear from the outset what the terms of the options will be. Key points to get right include:
- Option price: this should be set carefully to ensure it does not exceed the market value of the shares at the point of grant. This ties in with the valuation discussions business owners should be having with their accountants.
- Vesting conditions: what conditions do you want to attach to the options? Should this be performance-based, time-based? Do the options vest over time subject to such conditions?
- Exit strategy – what happens in the event of a sale of the company? What happens if an employee departs from the company? Do they forfeit their options or can they be kept?
Having clear answers to these types of questions will ensure that the process of drafting and finalising the option agreement and scheme rules is as simple and efficient as possible.
2. Clear and timely communication with employees
The success of any EMI scheme is largely dependent on employee engagement. A key part of any process to implement a scheme should be carefully thought out and executed engagement with the relevant employees. They should be made aware of the terms of the options, the process for exercise of the options, and the tax implications. The more engaged and informed the employees are about the process, the more effective the scheme will be as a motivational and retention tool.
Our recommendation would be to consult with the relevant employees ahead of implementing the scheme to ensure their buy in right from the start, and to accompany any scheme documentation with an explanatory note on how the scheme functions and what benefits it carries for the employees. Business owners should liaise with their professional advisers to draft and execute a clear communication plan to accompany the scheme.
3. Employment law considerations
Following on from the point above, there is a key workstream around ensuring that the scheme complies with employment laws. Giving proper consideration to this aspect will help the smooth operation of the scheme and avoid any potential disputes. Key points to consider include:
- Making sure you provide employees with written details of the options they have been granted
- Addressing any issues which may crop up around discrimination or equal treatment of employees
- Ensuring employees’ rights are protected in the event of termination (i.e. what happens to the options if an employee leaves).
We recommend having a discussion with an employment lawyer to ensure there are no trip hazards which could get in the way of smooth implementation of the scheme.
4. Impact on corporate governance
A successful scheme which results in the grant and subsequent exercise of options will have a tangible impact on the company’s share capital and governance. There are a number of key considerations here which business owners should work through with their legal advisers:
- If the options are for a fresh issue of shares rather than over existing share capital, then there will likely be dilution of existing shareholders’ ownership. It is important to discuss this with the existing shareholders in advance and consider how best to structure the scheme to avoid any unintended consequences around ownership and control.
- There may be a need to amend the articles of association to reflect the terms of the scheme – common issues to consider include the rights attaching to the shares and the circumstances in which they can be transferred.
- If there is a shareholders’ agreement in place, consider whether there is a need for employees to adhere to the shareholders’ agreement, and whether there needs to be any additional minority shareholder protections.
Conclusion
An EMI scheme can be a powerful tool for incentivising and retaining employees. However, it is key to ensure that the scheme is carefully thought out and implemented to maximise the benefit to both the business and the employees. Early engagement with your professional advisers (both legal and financial) to consider points such as those set out above is encouraged to ensure the scheme achieves its intended goal.
If you are looking to implement an EMI scheme, or you are keen to discuss different options for employee incentivisation, schedule a complementary discovery call with the team today.
About Mahitha Kumar:
Mahitha Kumar is a corporate and commercial lawyer admitted in New Zealand, as well as a chartered accountant with Chartered Accountants Australia and New Zealand. Her previous experience involves working at a top 10 New Zealand law firm, and in the transaction team at Deloitte, giving her rich experience in corporate structuring, M&A, fundraising, equity documentation and general commercial drafting and advisory.
Contact email:
mahitha.kumar@sumer.co.uk
